Payday Lending Regulation and the Demand for Alternative Financial Services

Federal Reserve Bank of Boston, Community Development Discussion Paper, No. 2014-01

25 Pages Posted: 12 Sep 2014 Last revised: 10 Dec 2015

See all articles by Roman V. Galperin

Roman V. Galperin

Johns Hopkins University - Carey Business School

Andrew Weaver

University of Illinois at Urbana-Champaign; Massachusetts Institute of Technology

Date Written: September 10, 2014

Abstract

In this paper we use a novel empirical strategy to estimate the net benefit of regulatory restrictions on the supply of fringe credit products. Our estimation measures the effect of strict regulation and prohibition of one such product — payday loans — on demand for another product — refund anticipation loans (RALs). Using a policy discontinuity at state border approach with zip-code-level panel data, we find an economically and statistically significant negative effect of strict regulation of payday loans on demand for RALs. A state ban on payday lending results in about five percent reduction in demand for RALs. We interpret this effect as evidence that the behavioral component is stronger than the rational-strategic component of demand for payday loans, indicating that strict regulation of payday loans may benefit households on net. We conclude with a discussion of implications for policy.

Suggested Citation

Galperin, Roman V. and Weaver, Andrew, Payday Lending Regulation and the Demand for Alternative Financial Services (September 10, 2014). Federal Reserve Bank of Boston, Community Development Discussion Paper, No. 2014-01. Available at SSRN: https://ssrn.com/abstract=2494426 or http://dx.doi.org/10.2139/ssrn.2494426

Roman V. Galperin (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Andrew Weaver

University of Illinois at Urbana-Champaign ( email )

504 East Armory Avenue
Champaign, IL 61820-6297
United States

Massachusetts Institute of Technology ( email )

United States

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